Current events in the words of the students of Vinod Gupta School of Management, IIT Kharagpur

Political Economy: Dr. Raghuram Rajan

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Dr. Raghuram Rajan, Governor, Reserve Bank of India has captured the audiences once again with his new ideas in his extraordinary speech titled “Democracy, Inclusion, and Prosperity”. In this embarking speech he talks about the field of Political economy. He politely argues about the fact that liberal demography is best at fostering political freedom and economic success. However, different nations choose different paths. Particularly why India evolved to form a democratic government and the neighboring nation China chooses to form communal government. The reasons he later provides are that China had history of military competition and so government evolved in form of unconstrained autocratic rule while in India the division of labor based on caste system led to form a democratic government.

At First, he brings up the Fukuyama’s three pillars of a liberal democratic state: a strong government, rule of law and democratic accountability. He openly puts that a strong government is not just on account of its military power or how strong is the defense mechanism of the nation. Instead, on account of how fair and effective administration it provides through clean, competent and motivated administrators. He contrasts the radical libertarian, radical Marxist views of strong government and condemns the tin-pot dictatorship as a sign of weak government. It requires expertise, motivation and integrity as vital organs of people to make a strong government.

He explains rule of law as universal code of moral and righteous behavior, enforced by religious, cultural or judicial authority. In other words, what history termed it as dharma! Without it, a strong government cannot survive. Democratic accountability means government has the responsibility to get acceptance from its people otherwise they will be shunned out of power from wrong, unpopular and corrupt doings. Think of a strong government to a big, powerful train which requires more than strong engines to drive. Rule of law can be put analogous to the physical train network that guides the train in right direction and Democratic accountability as the process by which consensus is built around the train schedule. For reality, Hitler formed a strong government but without rail networks. Indian government formed a weak government but always stayed away from the arbitrary exercise of power.

Secondly, he elaborates on how the free enterprise and political freedom can mutually reinforce. Hence, free enterprise becomes the fourth missing pillar of the Fukuyama’s theory. He explains that a democratic state is far beyond fundamental rights. Democracy if complimented with fair competition can be an answer to cynic view of wealth inequality. Hence it reaches a state of harmony between the rich and median voters. Ultimately, Free enterprise keeps check on the official arbitrariness and thus the missing piece in the theory.

With all this said, he puts his view points on how governments are heading and what challenges remain forward. The one he fears is the equitable distribution of economic capabilities. He believes that world is no longer a level playing field as theories has suggested. The growing inequality arises from the unequal distribution of resources or the buying power of the rich over middle class people. This in turn has led to the erosion of the benefits from free enterprise and democracy.

Finally, He summed his speech with some lessons that India can learn on this endeavor. He believes India has evolved the other way in terms of developing three pillars. That is, India has a weak government with very strong rule of law and democratic accountability. He posits that strong administration with rightful power can only save the nation rather than putting layers and layers of checks in place as it only slows down the progress. Along with this, we need to modulate pace at which we broaden economic capabilities. Equal opportunities and economic inclusion of all citizens is necessary, he strongly urge, not just for sustainable development but as a moral imperative.